Microsoft has had few critics more vocal than Oracle CEO Larry Ellison and Sun Chairman Scott McNealy. With their companies set to merge in a blockbuster US$7.4 billion deal announced Monday, is it time for Microsoft to worry?

The news today about IBM and Sun possibly going separate ways leaves a door open for others to dodge what could have been a pretty blockbuster combination. I remember back in late 90’s how cool Java was and what it meant for Sun. Continue reading →

NEW YORK, March 25 (Reuters) – IBM (IBM.N) will cut about 5,000 jobs in the United States, adding to similarly large cuts in the past few months, sources with knowledge of the matter told Reuters on Wednesday. Continue reading →

Every year, spring brings gives us two things: another rendition of the Open Source Business Conference and rumors of Oracle buying Red Hat, plus various other activities related to open-source consolidation.

In years past OSBC has taken flight with rumors of Zend (false!), JBoss (true!), MySQL (true!), etc. on the block, with Oracle often the proposed buyer. Continue reading →

The Microsoft (MSFT) boss is sitting down with BusinessWeek editor Stephen Adler at the McGraw-Hill media conference. Expect at least some chatter about Yahoo (YHOO) and its new boss Carol Bartz, who just happens to be visiting New York this week as well.

Following is paraphrased live notes, unless in quotes. Please refresh your browser for updates.

Starting off with an economy question: Should be believe that recent rally means things are getting better?

SB: The principle we’re operating on is that the economy will contract, reset… and we’ll begin again what I call “regular growth”. We had had abnormal growth fueled by too much debt in the system. I don’t how long that will take. It could take, two, three, four years to get there.

SA: Back to MSFT business. Why don’t you dominate search?

SB: We had to start essentially from scratch about 6 years ago. Essential thesis: Most of the innovation is still come in search. Search hasn’t changed much in the last 5 years, 10 years. “It’s gotten somewhat better, but at the end of the day you search to do something, you don’t search to find links to web pages.” We think there’s a lot of innovation yet to come. We’ve learned that cost of just getting into the game – the table stakes – is a lot higher than we realized in R&D, capex. Google (GOOG) is making that investment, Yahoo can’t, we are.

SA: Isn’t much of this a marketing question, that no one visits you for search?

SB: Yes. But it means opportunity for us. Our brand will differentiate us, and if we can just get 15 or 20% in the next few years, that’s a big step up.

SA: Please tell us about Kumo, your new search product.

SB: Not really ready to talk about it. Need a new name. We update search every 9 months. Going still call it “Live Search” for now.

SA: So not a new product, just an incremental release?

SB: “I think we could use a “set change” as they say in organizational behavior classes, and when we’re ready to release one, we will”.

SA: What’s up with Yahoo talks?

SB: Principles first: “Whether or not there’s a partnership to be had with Yahoo, we think our own innovation… it’s not about Yahoo’s technology. It’s really about getting the pooled volume, because you actually can improve your product faster if you have more users.” If you have more advertisers, you can improve the product as well. “There are returns to scale. And putting the scale together is valuable.”

“With that as context, we’re largely on the same strategy, with or without a partnership with Yahoo.” I’ve talked with Carol briefly, over the phone. “I’m sure when it’s appropriate, we’ll have a chance to sit down and talk.” I’ve known her for years. She’s straightforward and friendly “and when she’s ready, we’ll have that type of discussion. Whether a deal gets done or not, who knows.” People at our two companies talk all the time.

SA: Will there be a deal?

SB: “There are a lot of things that are fairly compelling economically in trying to put our two search efforts together in a partnership.” I thought that last year, and “I got bailed out of this economy by Yahoo on that”. [Laughs].

SA: Do you own an Apple (AAPL) products?

SB: “No. I don’t. My sons don’t. My wife doesn’t.”

SA: Why does MSFT, which is so smart have so much trouble outside of Windows, Office. Why so difficult to expand beyond that (ie against the likes of Apple?).

SB: “Most people in our industry never expand beyond one thing.” So the fact that we have Windows, Office, business software…”So beyond those three, Mrs. Lincoln, or whatever, how was the play? I think I got that backward, but you get the point.”

Xbox doing great for us. Incredible asset, opportunity. We have areas where we have our work cut out for us. No doubt that Apple does a nice job in video and music services. We’ve talked about search… but if you were a shareholder, I’d also say, it’s great because there’s lot of opportunity.

SA: Whither Zune?

SB: “We’re going to keep going with Zune”. It’s two things: Service and a device. The Zune service, that’s going to fan out its footprint. Hardware will continue to improve. “The question is whether even if we flog them heavily, is their profit upside”. We’re going to keep going “I won’t say full steam ahead, because that implies acceleration of investment, but we’re going to sustain our investment.” We like it and the future may be the software/ecosystem on other devices.

On to smartphone market:

SB: Smartphones will go from 10% to 70 or 80% of market next few years. So what will people want? Good experience built in, w/out downloading stuff. You want good price range. iPhone is very expensive phone, without a keyboard. Some people can’t afford them. Sweet spot is phones that cost $150 to $200 to make — forget retail price. iPhone is about $500. We want to provide vendors with ability to make Windows phones up and down the price scale.

Unless you assume Apple and BlackBerry are going to sell the lion’s share of most phones, which I don’t, I think the play for us is to provide broad innovation at many price points.

A $500 phone is not going to work for everybody in every market. The most popular phones in China and India cost about $25 to build. We can’t get our software on that.

SA: Do you care about “touch” on phones? The blogs say you are.

SB: Windows Mobile 6.5 has touch on it. The way Apple does touch drives cost. They way they do it on the iPhone is not an inexpensive component. We’ll do it in a way that you can afford to do it on most phones.

SA: What are you thinking with these retail stores? How different than Apple?

SB: You have an interesting case in the US. Right now there’s a range in innovation, around, by our partners. Not selling software in stores, but hardware. It is a challenge today for our partners, who do the most innovative designs, to get them to market. Because it’s too high risk for the Best Buys of the world. So we need an outlet to champion that innovation. Showcase devices that are hard to get stocked in traditional electronics retailer.

Apple actually sells about half of all Apple machines through its stores or online. We’re not going to do that for PCs. But we don’t to show off interesting stuff. It’s sort of like our enterprise consulting services, which doesn’t really compete with the big consultants. It’s a place to showcase.

SA: Back to Windows/Office. How are you adapting the Cloud – Software as Service?

SB: I think we’re doing a good job. Rattles off series of vaguely cloud-related services – things that involve the Web. “We’re doing a lot of work in the area and I see all upside from the cloud.” Do we have competitors? Sure. Is Google going to compete with us? Sure. We try to compete with them, too. Everybody makes their software really run on the client. The truth of the matter is that nothing is really a Web software — even Google Apps. Everything really runs on the local device, because it runs better there.

SA: What do you think of IBM/Sun deal?

SB: “I don’t exactly get it, but it doesn’t exactly surprise me either.” Logical exit strategy for Sun shareholders. On IBM’s side. “I think you pick up a lot of stuff when you buy Sun” and you have to figure out if you want everything you’re going to get. “It doesn’t change our fundamental” economics, strategy. “I think it gives me a year or two where they’re digesting it. I relish that year.”

SA: Recently you promised to keep investing in R&D, etc and you got criticism for that. Please respond.

SB: The feedback we’ve gotten isn’t just about the R&D number. It’s “Cut costs. Cut them more.” But in R&D, when you’re giving someone some people today, you’re really, giving them more people tomorrow. So we need to flatten that curve a bit. There are plenty of areas where we spend less than the competition. Apple, for instance, spends much more (proportionally) on marketing than we do.

SA: Those layoffs you announced may have been the first major round you did. How are you absorbing that.

SB: We feel bad about the layoffs. Nobody wants a death by a 1,000 cuts. So we really thought it through beforehand. I “revectored” my Christmas and New Years to go over this. “While it’s not fun, they’re moving forward with good attitudes.”

SA: Talk about future markets, opportunities

SB: PC market will shrink nearterm, but when it turns around Windows/Office will go gangbusters. Cloud-based services has big growth. Big possibilities in servers/mainframes. On a percent basis, fastest growth will be in search, phones. Those things will grow quickly, but we’re still in investment mode. Xbox we’ve turned the corner on. We’ve paid our upfront costs. Have big base of subscribers, and a real opportunity for it to be “more than a console” and I think you’ll see that 12 months from now.

On convergence: Zune needs to come from the cloud and support the TV. It will support the phone/mobile device, and it has to run on the PC. Right now it’s on a device but it broaden from there. LiveMessenger will work the same way.

But the PC has real advantages compared to TV or mobile. TV has no intelligence. The phone today is pretty nascent. There will be about 300M PCs sold this year, compared to 20M iphones or Windows Mobile phones. PCs are open. PCs are compatible. So importance of PC-centered innovation…most of the new media creation, the PC will actually be the primary target device, for now, and eventually the same type of opportunities will be available on three screens, from the cloud.

SA: What about M&A?

SB: “We don’t have an acquisition strategy. We have a business strategy that might lead to acquisitions.” We did 20 deals last year. We’ll do about 20 this year. Most between $10M and $400M in value. “But will be buy many things things that are $2, $3, $4B and up? We could.” But I’m not sure we will. But integration is hard. And pricing is hard. “Nobody knows what asset values should be, at least until the economy finishes resetting”. I only get involved in deals about “a couple hundred million”.

[Missed some parts about evolution in Ballmer’s management style. Apologies]

SA: Is it better now that Bill Gates is gone?

SB: “It’s different”. We’re growing, but “we miss Bill.” But everyone values what Bill is doing with this nonprofit, and everybody relishes the chance to grow. Windows 7 is a great product, that we’re building without Bill’s involvement.

SA: You recently called on government to invest in innovation. What should they be doing?

SB: “A lot of basic research in this country needs to be funded by government.” A lot of important research has come out of government, and I think it’s important that they understand it. GDP growth comes from basic transformations in science and the business cycle. “The most important thing is that the government says, he we believe , and we’re going to put our money where our mouth is” on the science side.

On the education side, anything we can do to shore up what is the best set of universities, I think the more we can keep that system healthy, the better.

“I’m not going to pretend to be the expert in how that happens.”

SA: You’ve made a lot of money [then a dig at Forbes]. What would you do if you weren’t running Microsoft?

SB: “I’m not really sure. I don’t really allow myself much time to think about it, because you might fall in love with it, if you think about it too hard.” I have kids who are 13, 14.

SA: So you’re saving for college?

SB: I mean that we’re not moving out of Seattle anytime soon. But if there’s one thing that captivates me, I think it’s education

commentary Stranger things have happened, but there are several reasons why IBM buying Sun Microsystems could, to borrow a phrase from former Sun Chief Executive Scott McNealy, be like two garbage trucks colliding in slow motion.

On paper, the deal could make some sense: adding Sun’s server market share would give IBM more clout in its competition with Hewlett-Packard, IBM would get some software and intellectual property assets, and that price would be a nice premium for Sun shareholders disappointed with the company’s sliding stock price.

But given how directly Sun and IBM product lines overlap, there are no shortage of serious difficulties, too.

Hardware
Let’s start with hardware. IBM already has four major server lines running a variety of operating systems–AIX, zOS, IBM i, Linux, and Windows–on three major processor families. IBM needs Sun’s Sparc processor and Solaris operating systems like it needs a hole in its head. It took years for IBM to break down some walls among its various server fiefdoms, but even now it has to reckon with complicated, often overlapping product lines.

Granted, Sun has, in its current Niagara and future Rock processors, some great intellectual property and expertise in designing multithreaded processors designs that can juggle a lot of tasks at the same time. But IBM would either have to adapt that technology to its own Power processors, a process that would take years, or embrace Sparc chips in its own line.

IBM or Sun could sell or license the Sparc line to Fujitsu, which has a line of its own and a Sun partnership. But the fact that Sun hasn’t done so on its own doesn’t bode well for Fujitsu’s enthusiasm for the idea, and buying Sun just to sell off one of its mainstay businesses erodes the market-share-grab rationale for the overall acquisition.

Sun also has a respectable line of x86 servers using chips from Intel and AMD. They aren’t a quantum level above the competition, though, and IBM already has a lot of in-house expertise with heavy-hitting x86 servers.

In storage, Sun made a big bet by buying StorageTek for tape drives that compete directly with IBM products. IBM might be able to consolidate customers in that market, but it’s not a big growth area. Potentially more interesting, though, is Sun’s Thumper line of x86-based storage devices, which have shown some life.

Software
Software is another tough sell for the bean counters. IBM’s embrace of Sun’s Java helped cement its success on servers, but for Sun, Java is more about intellectual property, industry influence, and bragging rights than big money. IBM might well have “Java envy”, as McNealy quipped in 2004, but it can console itself with having a much larger Java software business in WebSphere.

The open-source connection in general is stronger. Both Sun and IBM have a history of both proprietary and open source software. IBM got an early edge through its embrace of the Linux operating system, support for the Apache server software, and founding of the Ecplise programming tool project, but Sun arguably has leapfrogged IBM with a more-open-than-thou philosophy under Jonathan Schwartz; Sun’s open source move now embraces its two biggest software assets, Solaris and Java.

More compelling for IBM perhaps is MySQL, an open-source database product widely used to power up-and-coming Web sites. IBM knows how to sell a database, but MySQL fits in a market where IBM’s DB2 doesn’t.

However, making money from open source software is a challenge, even if it’s a great way to appeal to developers and to needle Microsoft. So the appeal of Sun’s software business is much less direct than something that would contribute to IBM’s top and bottom lines.

Cloud computing, which combines hardware and software, is an area where Sun has some experience and some bruises; it announced a second attempt Wednesday to tackle the market for a general-purpose computing foundation that customers can pay for as needed. IBM has some experience in the area–including a history that extends to a cloud computing progenitor of decades past called time sharing–and overall, it’s hard to imagine that IBM is unable to do this on its own.

Intangibles
Sun and IBM have different cultures that could prove difficult to integrate. Sun, based in Silicon Valley, is an engineering-centric, free-wheeling company willing to try many ideas and see which ones stick. IBM is more conservative and driven by business concerns. Its bold moves often take years to pan out. Both companies share a passion for research and development, but how they bring that to market differs greatly.

Sun employees looking at the company’s troubles might well be happy to don blue Oxford shirts, at least figuratively. But it’s not easy to reconcile different procedures for allocating resources, marketing products, assessing their success, and charting new directions. And IBM might well sidestep cultural mismatch issues by laying off thousands of Sun employees.

The closest parallel from recent history is Hewlett-Packard buying Compaq–the deal that McNealy said in 2002 was “a slow-motion collision of two garbage trucks”. HP and Compaq had overlapping product lines, too, but fairly rapidly coalesced them, for example, by immediately displacing HP’s x86 server line with Compaq’s stronger line and by scrapping Compaq’s Tru64 Unix. What’s different about Sun and IBM is trying to figure out which Sun assets would emerge victorious over IBM’s.

The fact that a company as large and rich as Sun could be had for $4 billion or so must appeal to IBM, which doubtless expects to emerge from the current economic problems as a consolidator, not as the consolidated. But the acquisition would have to be justified not so much as fleshing out IBM’s already rich product portfolio, but rather on the basis of acquiring good engineers, a strong portfolio of intellectual property, a reasonable developer community, and one less competitor in the market.